EUR/USD Mid-Week Overview: Effects of Sovereign Debt and US Tax Bill

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On Monday evening, the euro zone finance ministers didn’t take any new measures to address the sovereign debt crisis. In the run-up to this meeting, there was a lot of debate whether the EMU should raise the amount of the rescue fund. Also the issue of an E-bonds was rumored to be on the table. However, the EMU Finance Ministers dismissed these calls. One might have expected some euro nervousness on the back of this status-quo.

In addition, the euro zone crisis remained in focus of the financial news agencies as the EU-27 Finance Ministers met on Tuesday. This meeting yielded again a lot of (sometimes divergent) comments from EU policy makers.

However, this time the damage for the euro was limited. Maybe, markets in some way joined the ‘analysis’ of German Finance Minister Schaeuble as he said that the EU didn’t need a new debate every week. To put it another way: the issues on the table were clear, but there was no hard news on any possible further steps to guide the price action on the currency markets. So, currency traders had to look elsewhere for guidance.

European equities performed quite a remarkable rebound as global investors reacted initially positive on the US budget agreement. Risk was on and EUR/USD moved to the high 1.33 area already during the morning session in Europe. Demand for funds in the European Central Bank tenders (1 week and 1 month) was higher than at previous auctions. In theory this could have been euro negative. However, the result of these tenders was no big issue for currency trading. The same was true for the October German factory orders coming out slightly weaker than expected at a 1.6% M/M rise.

In the US, there were only some second tier economic data on the agenda. US equities joined the optimism on the back of an agreement between the Obama administration and the Republicans on the extension of the Bush tax cuts and some other fiscal measures to support the economy. At first this continued to support overall risk appetite. EUR/USD reached a minor new high in the 1.3400 area early in US trading, but a clear break again didn’t occur.

However, from there, sentiment on global markets gradually changed. The rally on the equity markets stumbled and EUR/USD changed course, too as the focus of investors turned to the rise in US bond yields in the wake of the US tax deal. One can raise the question whether the combination of at the same time a loose monetary policy (see Bernanke quotes this weekend) and a loose fiscal policy should in the end be supportive for the currency (in this case the dollar).

However, markets apparently focused on short term swings in yields/interests rate differentials and this development was seen USD supportive. Some headlines of IMF chief Strauss Kahn, mentioning the option of a spilt of the euro zone, might have weighed on the euro, too. So, EUR/USD completely reversed the earlier gains and closed the session in negative territory (1.3261 compared to 1.3308 on Monday evening).

Rating Agency Moody’s expressed concerns about the long-term impact of the extended tax cuts on the country’s finances and credit-worthiness. However, at least for now, this is not yet seen as a concern for the US dollar.

As was already the case over the previous two days, the calendar of economic data is again thin. The German industrial production data of October will be published. However, this report is usually only of intra-day significance for currency trading, at best.

In the US, only the mortgage applications are on the agenda. Yesterday and on Monday, the financial news wires had a good excuse to continue to dig into all kinds of European issues as the E(M)U finance Ministers met in Brussels. This factor might
gradually disappear today. However, yesterday, rising US bond yields apparently has become a factor of growing importance for currency trading. It will be interesting to see whether this theme will continue to gain in importance.

Content provided by: KBC Bank

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By ForexNewsNow Team

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